Unit 05 · Homework

Homework — Book Values, Market Values, Inflation, and Currency

Book Values, Market Values, Inflation, and Currency · Nigeria · ₦ + $

One required question per video, turned in to the TAs. The optional extras are on the practice problems page.

Homework for Week 5. Each set belongs to the video of the same number. One question in each set is required; answer it and turn it in to the TAs. The rest are optional practice, and worked answers to those are published alongside the set. A full set takes about twenty minutes. Work them before the case session.

Homework · 5.1

1. A firm bought machinery six years ago for ₦60M and depreciates it straight-line over ten years (so 6M per year). Comparable used machinery currently sells for ₦28M. State the book value (hint: subtract 6 years of depreciation), the market value, and the gap, and explain the direction of the gap.

Homework · 5.2

1. Company A buys Company B for ₦500M, of which ₦180M is for identifiable assets. What appears on A's balance sheet, and what would have appeared if A had built B's business itself over ten years? Explain why the accounting treatment differs.

Homework · 5.3

1. A firm has ₦600M of equity at market and ₦400M of debt. It borrows a further ₦150M and immediately pays it out as a dividend. Describe the direction of the effect on the market value of the existing debt, and explain who gains and who loses.

Homework · 5.4

1. A Ghanaian treasury bill yields 21% and inflation is 18%. Compute the exact real return.

Homework · 5.5

1. A Ghanaian firm exports to Europe and borrows in euros. Is it more or less exposed than a Ghanaian firm that exports to Europe and borrows in cedis? Explain.

Homework · 5.6

1. A firm has total assets of ₦200M, naira liabilities of ₦90M, and a $80,000 loan at ₦800/$. Compute its equity. Then recompute if the rate moves to ₦1,400/$, and state the percentage of equity destroyed.